IRS Discouraged Fraud Detection

The Internal Revenue Service has been looking the other way instead of rooting out fraud when people apply for taxpayer identification numbers, Treasury Department investigators said Wednesday, exposing a shortfall with both financial and national security implications.

A member of Congress who sits on the House’s tax-writing committee responded to the report by calling on IRS Commissioner Douglas Shulman to resign, claiming the IRS is helping illegal immigrants defraud the government.

Non-citizens without Social Security numbers have to get ID numbers from the IRS to claim tax refunds. Their applications for ID numbers are processed at an IRS center in Austin, Texas.

J. Russell George, the Treasury Department’s inspector general for tax administration, said investigators looking into the application process found “an environment which discourages employees from detecting fraudulent applications.”

Instead, IRS employees were encouraged to process as many ID applications as possible, George said in his report. In addition, investigators learned that the IRS had quit using successful fraud-detection measures in processing the applications.

“There is a potential that erroneous tax refunds are going to non-qualifying individuals, allowing them to defraud the federal government of billions of dollars,” investigators wrote in the report.

Once ID numbers are obtained fraudulently, they can be used for other deceptions. When first introduced in 1996, the ID numbers were supposed to be used only for taxes. But investigators found they’re now being used in several states to get driver’s licenses.

Almost 3 million tax returns seeking $6.8 billion were filed last year using IRS ID numbers rather than Social Security numbers. Investigators said they couldn’t put a number on how many of those returns may have been fraudulent.

At issue are the documentation requirements for verifying the identity of those who apply for an ID number. Unlike applications for a passport or a Social Security number, applicants for the ID number weren’t required to submit certified copies of their birth certificate or other identification.

IRS managers had been aware of the problem since at least 2002, but failed to take sufficient action, investigators said. Tax examiners at the agency also complained to investigators they had little to no training in how to root out fraudulent applications.

IRS officials responding to the report said they already had taken action to address the problem. In June, the agency started requiring original or certified documents until new rules can be developed for 2013.

Treasury investigators said the IRS has agreed to adopt seven of their nine recommendations for correcting the problem and is still considering the other two.

In a letter to Shulman calling for his resignation, Rep. Sam Johnson, R-Texas, cited investigators’ findings that people sought $4.2 billion in refundable child tax credits last year using IRS ID numbers.

“The commissioner and certain IRS officials are essentially aiding and abetting illegal immigrants and others in fraudulently receiving tax refunds courtesy of the American taxpayer,” Johnson said in a statement.